Borrowing to lend on Prosper.com
June 22nd, 2006 | by mbhunter |I’ve seen a couple of listings on Prosper.com for people borrowing solely for the purpose of lending it on Prosper.com!
Didn’t take too long for creditworthy people to realize that they could borrow a few thousand dollars at 7% to 8% and lend it to less creditworthy individuals (according to their credit ratings) for a few percent more. All in the comfort of Prosper.com.
There are no guarantees for profit here, of course — a few defaults will wipe out any earned gains in a hurry. And for the kinds of loans the lenders will need to accept to get a positive spread, the odds of default are higher.
At the core, it’s still borrowing to invest, which has risks — if the investments go sour, you still owe the money you borrowed. The risks are a little easier to characterize here than for some other investments, perhaps. A person with a AA credit rating has demonstrated better money-handling ability — or at least has had an easier life — than a person with an E credit rating, so you know what you’re getting into. It makes sense to ask questions of the prospective borrower for an explanation as to why their credit rating is so low.
It would be great if someone is blogging about such an endeavor — but I suspect that once everyone knew how to do it they would, and would compete with the person blogging about it. 
2 Responses to “Borrowing to lend on Prosper.com”
By traineeinvestor on Jun 22, 2006 | Reply
Question for the lawyers: is borrowing to lend a business activity and, if so, does it trigger any regulatory isssues? I do not know the answer for the US (I do not live there) but in at least some countries the borrowing part would trigger issues if it is done as part of a business.
By John M on Jun 22, 2006 | Reply
I see two problems with this as a long term investing plan.
1.)If others wanted to do this they could finds cheaper ways to get cash to fund the poor loans.
2.)Sub-prime lending is inherently risky and even when companies properly calculate the risk and diversify their loan portfolio, they still could get burned. Inexperienced lenders are more likely to lose money because it is not only important to go through their credit report, but also involves looking for clues to see whether the credit problems were due to one big mistake or loss; or whether it is due to a pattern of poor behavior. This can be a lot harder than just analyzing the facts.